Taking advantage of as many tax breaks as possible isn’t a question for most of us- it’s just human nature. What many taxpayers don’t realize is that tax rules for personal property and investment property are not the same. When confused, the taxpayer runs the risk of paying fines and penalties and possibly missing other tax breaks.
The advantage of real estate is a sizable tax deduction, and it is essential that you DON’T confuse the two! Let’s take a look at personal real estate tax deductions.
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Personal Real Estate Tax Deductions
Before we start, it is vital to be aware that the purchase price of a primary residence is not, in any way, shape or form, tax deductible. This is area number one of the confusing domains where taxpayers make the mistake of mixing the rules that apply for personal real estate and rental property real estate. The next confusing area that tends to lead to taxpayer mistakes is deducting the cost of renovations, repairs or maintenance- which is also forbidden! The list goes on and Movoto will outline it a little later in this article. For now, let’s take a look at personal real estate tax deductions.
Mortgage Interest Deduction
The top rated tax benefit of US homebuyers is the mortgage interest deduction. For the first few years of owning a property, nearly the entire monthly mortgage payment is made up of almost all interest. The government allows taxpayers to deduct this interest, which results in an exceptionally nice reduction in tax liability for the taxpayer. The downside is there being a cap!
Taxpayers can deduct the interest paid on a mortgage of up to a million dollars. If the taxpayer is married and filing separately, then the deduction limit is $500,000.
Home Improvement Loan Deduction
Interest on home equity loans or home improvements with a principal of up to $100K can be deducted provided that the debt is secured by a lien on the taxpayer.
Private Mortgage Insurance Deduction
Your primary insurance or PMI can be a large part of your monthly payment, and it can be a tax deduction, provided that your mortgage was originated after January 1, 2007. In order to be eligible, the taxpayer’s adjusted gross income must be over $54,500 for individual filers, and $109,000 for married couples filing joint tax returns.
Mortgage Points / Origination Deduction
Points that were paid at the closing of the home purchase or refinancing of the taxpayer’s mortgage can be deducted within the same year. For instance, if $3K was paid in points, then the taxpayer could deduct this amount.
Energy Efficiency Upgrades / Repairs Deduction
Energy efficient upgrades to your home are not actual tax deductions, but they are a tax credit, which will lower the amount you owe on your income taxes. Homeowners can deduct 10 percent of the total bill for energy efficient materials used to upgrade their home, up to $500. Some items, such as air conditioners, windows, furnaces and heat pumps have individual limits.
Profit on Sale of Real Estate Tax Deductions
If you have sold your primary residence in the past year, then you can claim up to $250K of profit from the sale, tax free. The claim for couples is $500K. In order to be eligible for the tax deduction, the home must be the primary residence of the taxpayer and the taxpayer must have lived in it for no less than two years of the past five years.
Real Estate Selling Cost Deduction
Taxpayers who sell their property and exceed the $250,000 / $500,000 profit limits still have the means to reduce their tax burden. Taxpayers can add up the closing fees paid, all capital improvements made to the home, the cost of repairs, and the cost to market the property. The figure is then added to the original price of the home and adds to the improvement and selling costs which reduce the taxable profit of the home.
Home Office Deduction
Taxpayers who have a home office that is their personal place of business and can deduct a percentage of their mortgage, repair bills, and utilities in direct proportion to the amount of their home. The total amount the taxpayer can deduct depends on the percentage of the home used for their home office.
Property Tax Deductions
Taxpayers can deduct their property taxes but they must be cautious to only deduct the amount they paid to their local municipality for the year.
Loan Forgiveness Tax Deductions
Taxpayers whose property was sold as a short sale can take advantage of the Debt Forgiveness Relief Act of 2007, which relieves the taxpayer of any money “short” on the balance of the loan, which the government views as taxable income. In other words, if your mortgage balance was $200K and your mortgage company agreed to accept $150K as the mortgage payoff, than the government views the $50K as taxable income, and without taking advantage of the Loan Forgiveness Relief Act, you would need to claim it as such.
Now, let’s get back to the “DON’Ts” that often confuse homeowners simply because different tax rules apply to personal real estate than rental property real estate.
- DON’T deduct the principal portion of your personal mortgage payment.
- DON’T deduct closing or settlement costs or document fee costs.
- DON’T deduct costs for improvements to common areas such as the sidewalk.
- DON’T deduct depreciation on the property.
- DON’T deduct labor, repairs, maintenance, or renovations.
- DON’T deduct electricity, cable, gas, or utilities.
- DON’T deduct special assessments on the property, unless all properties in the jurisdiction are being taxed.
- DON’T deduct any fees paid for services to the property such as trash collection.
